Passport Capital, a hedge fund managed by John Burbank, has reported a position of 1.1 million shares in Yelp Inc (NYSE:YELP), which makes for 6.3% of the outstanding shares of the business reviews website. Our database of 13F filings shows that the fund had not owned any shares at the end of the third quarter of 2012. Earlier this year we looked at Passport’s investment philosophy and process. Learn more about how Burbank and his team invest and see what stocks it did own at the end of September. We track hedge fund filings to stay up to date on what these investors are doing, as well as to help us develop investment strategies; the most popular small cap picks among hedge funds, listed in our August newsletter, outperformed the market by 18 percentage points between September and January (read more about our hedge fund strategies).
Yelp Inc has become something of a battleground stock. On the one hand, we’ve reported on several hedge funds taking significant stakes in the company; just two weeks ago, Robert Karr’s Joho Capital reported that it had increased its own holdings to almost 6% of the outstanding shares. Read more about Joho buying Yelp. Steadfast Capital Management has also been a major shareholder in the company. On the other hand, over 60% of the outstanding shares are held short and we would note that our records of insider trades include a number of insider sales in the past few months, including three different insiders selling over $100,000 in stock in January 2013 (see a history of insider sales at Yelp). Insider sales generally aren’t as informative as insider purchases as selling shares can be rational, but it can be a factor to take note of.
Let’s look at some of the company’s peers:
We can compare Yelp to Facebook Inc (NASDAQ:FB), which is developing its Social Graph partly as a way for users to find local businesses their friends like; Google Inc (NASDAQ:GOOG), Groupon Inc (NASDAQ:GRPN), whose local deals offer an alternative source of marketing for local businesses; and OpenTable Inc (NASDAQ:OPEN). Google, as the most established company out of this peer group, trades at 14 times forward earnings estimates. That figure is based on expected earnings growth from both the search business and from improvements in integrating Motorola Mobility Holdings, so investors should not take it quite at face value though there is certainly potential for improvement on both fronts.
Facebook’s forward P/E is 36; again, this is based on consensus of high earnings growth and so we would be cautious. We also haven’t been particularly impressed with Social Graph; while it has some prospects, it’s not enough to justify a valuation of $30 per share. Groupon and OpenTable are similar situations, though in those cases nobody is looking for a monetization strategy: the improvements in these businesses this year, which would still place their earnings multiples in the 20s, are supposed to come from their current revenue-generating offerings continuing to grow enough to carry net income higher. We think that investors should avoid both of these stocks, as Groupon is actually currently struggling with profitability and there have been some concerns that OpenTable- while it’s certainly a valuable service- may have trouble winning over marginal customers. We’d note that they are also both popular short targets.
Disclosure: I own no shares of any stocks mentioned in this article.
